PG&E formally sought bankruptcy protection on Tuesday, arguing it’s the only way to restore financial stability amid soaring potential liabilities from one of the deadliest wildfires in California history.
The nation’s largest power company, which might face claims of as much as $24 billion from the Camp Fire that began in November, listed assets of $71.2 billion and debt of $51.4 billion in a petition filed in federal bankruptcy court in San Francisco. PG&E had notified regulators of its plans two weeks ago and arranged so-called debtor-in-possession financing from JPMorgan Chase, Bank of America, Barclays PLC, and Citigroup, according to a regulatory filing.
Such financing provides a lifeline to distressed firms, typically taking precedence over other outstanding debts in return, and will give PG&E enough liquidity to fund ongoing operations during a bankruptcy that may stretch over two years, the company said.
“Our most important responsibility is and must be safety, and that remains our focus,” John Simon, the company’s interim CEO said in a statement. The company, which already grapples with aging equipment spread through heavily wooded areas that can ignite easily in dry weather, faces heightened risk from California’s “inverse condemnation” doctrine.
An effort by former Gov. Jerry Brown to change the policy, which leaves utilities liable for wildfire damages linked to their equipment even if the companies didn’t act negligently, proved unsuccessful last year.
“We are fully committed to enhancing our wildfire safety efforts, as well as helping restoration and rebuilding efforts across the communities impacted by the devastating northern California wildfires,” Simon said. “We have heard the calls for change, and we are determined to take action throughout this process to build the energy system our customers want and deserve.”
PG&E had 5.4 million customers in 2017, more than any other U.S. power provider. While filing bankruptcy was the utility’s choice, “it does not change my focus, which remains protecting the best interests of the people of California,” said the state’s new governor, Gavin Newsom, who has joined with his peers from Oregon and Washington in calling on President Trump to double the amount spent managing U.S. forestland in the three states.
Roughly 57 percent of California’s 33 million acres of woodland are federally controlled, and Newsom’s office said the U.S. Forest Service budget has been cut by more than $2 billion since 2016, reducing its ability to manage wildfire risk.
“My administration will continue working to ensure that Californians have access to safe, reliable and affordable service,” Newsom said Tuesday, and “that victims and employees are treated fairly.”
The hedge fund Blue Mountain Capital Group, which holds $52 million worth of PG&E shares, immediately criticized the bankruptcy as “reckless and irresponsible” and said it would nominate a new slate of directors to replace the existing board.
Blue Mountain had argued in two separate letters to current directors that a bankruptcy would be premature, partly because the utility doesn’t yet know whether its equipment was responsible for the Camp Fire, the blaze that destroyed the Northern California town of Paradise along with nearly 14,000 homes and killed at least 86 people.
Because of that, the utility’s argument that liabilities from the Camp Fire and others might top $30 billion is insufficient to justify a bankruptcy, especially when compared to its market value of more than $35 billion before the blazes, Blue Mountain claimed. As the ultimate owners of corporations, stockholders typically bear the brunt of losses in bankruptcies, with preferential treatment afforded to creditors.
A bankruptcy would also delay payment of claims by victims of recent wildfires, Blue Mountain argued.
PG&E had renewed wildfire insurance coverage in mid-2018 for a total of $1.4 billion, but its liability for the Camp Fire alone might be between $8.7 billion and $13 billion, JPMorgan Chase estimated in late 2018. The investment bank Goldman Sachs projected a range of $9.9 billion to $12.5 billion.
Daniel Ford, an analyst with the Swiss lender UBS, said PG&E’s responsibility could reach $24 billion, absent state assistance that might trim that amount by 75 percent.
While a California law passed in 2017 creates a mechanism for electrical utilities to pass the costs of wildfire-related damages on to users, it applied to disasters in that year as well as those in 2019 and afterward. No specific provision was made for fires in 2018.
